In his comprehensive course on investing, Campbell will teach you a proven, straightforward strategy that will help you take control of your investments and invest successfully.
Do you, like most people, fear losing money in the stock market?
Do you know why the stock market always reaches a new high?
Understanding these principles will give you the confidence you need to get through the ups and downs of the market.
The Book
Expert and easy-to-follow teachings on investing, saving for retirement, and overcoming fear
Investing Profitably provides sensible and time-tested wisdom on planning your investments over a lifetime. Forgoing the trends and fast money schemes, Campbell’s lifelong career at Goldman Sachs has given him great insight into how to diminish fear with knowledge and develop a lasting strategy to maximize your return.
Written as a letter and gift to his five grandchildren, this book provides a vital foundation in investing for people of all ages and places in life. Included are three Recommended Portfolios, likely to perform better over a lifetime than similar, actively managed funds because of their tax-efficient, zero-fee, negligible expense, and diversified index funds. A sound strategy balanced through saving, investing, and tax-deferred compounding is carefully explained to help you increase your investments successfully and profitably.
About
Why I Wrote
Investing Profitably
Dear Brooks, Coleman, Charlie, Alex, and Campbell Grace,
I started writing this book as a letter to you, my grandchildren. However, as I went along, I realized the ideas and recommended portfolios were meant to be a book to teach the fundamentals of lifelong investing to many other people as well. For young people, it can liberate them from the lure of working in the investment business and open another intensely interesting, purposeful career. For anyone who fears losing money it will teach how to diminish anxiety and invest successfully. For those who are baffled by the mysterious, seemingly complex process, it will guide them in a straightforward way. For most investors, who underperform the market after taxes, fees, and expenses, it will teach them how to earn the market’s total rate of return. Few individuals know the answer or how to correct this costly yet easily rectified deficiency.
Fear of losing money is the greatest obstacle to investing successfully. Thus, it is a terribly costly emotion. The unnerving tug between wanting to make money and the fear of losing it can easily lead to unwise emotional decisions. Our emotions encourage us to buy when we’re euphoric. This typically occurs after the market has risen and we expect a continued increase. In turn, the emotional pressure to sell is greatest when we’re fearful and scared. This happens after the market has declined and we project continued erosion. Millions of investors were terrified by the bear markets of March 2000–October 2002 when the S&P 500 declined 49.1%, and October 2007–March 2009 after it plummeted 50.9%. These events created indelible memories and vows to never invest again. Consequently, these individuals did not benefit from the S&P 500’s 609% total rate of return (including reinvested dividends) from March 2009 to December 31,2020, or the price advance of 455%.
When the topic of investing arises, people repeatedly tell me they fear losing money. They don’t know whom to trust or believe. They wonder what securities to buy and when to purchase them. They fear the market is too high and approaching another peak. Or they simply find it confusing and scary. As a result, they frequently do nothing. If you’re like most individuals, you’ll know exactly what I’m talking about. On July 11, 2015, The New York Times published an article by Sendhil Mullainathan, Professor of Computation and Behavioral Science at the University of Chicago (and formerly an economics professor at Harvard), entitled “Investing in the Dark, Even an Economist is Confounded by the Complex World of Mutual Funds.” He said, “When new acquaintances learn what I do for a living, they routinely ask, ‘So how should I invest my money?’ I wish I knew.” Simply stated, someone you trust must teach you how to invest.
That is what I, the former Director of Private Client Investment at Goldman, Sachs & Co., hope to do.
John Campbell
Table of Contents
Investing Profitably
1 • WHY I WROTE THIS BOOK 1
Essential Elements 3
2 • INVESTING PROFITABLY 11
Reasons to Invest
Tax-Deferred Compounding: The Penny Story 14
You Will Not Outperform the Market 18
Perspective 19
3 • PERSONAL INVESTMENT PLAN 21
Save to Invest 22
How to Save 23
Three-Step Plan 24
1. Identify and Prioritize Goals 24
2. Cost and Funding 26
Retirement 26
Education 27
General Investment 31
Rule of 72: Time and Rates 31
3. Will the Plan Achieve Your Goals? 32
Investment Policy Statement 33
What Do You Buy? 35
Choosing the Proper Account 38
When Do You Buy? 38
When Do You Sell? 38
4 • DIMINISHING YOUR FEAR OF INVESTING 42
Why the Market Eventually Reaches New Highs 44
You Control Most of It 46
Time: An Indispensable Ally 48
Probabilities of Earning a Profit 49
Compounding 49
Tax-Deferred Compounding 49
Long-Term Capital Gains Tax Rate 50
Converting an Unrealized Loss into a Gain
Risk and Volatility Differ
Your Tolerance for Risk and Volatility 54
5 • ASSET ALLOCATION 58
The Most Crucial Decision 58
Diversification 62
Size (large, mid, and small-market capitalization) 63
Style (growth, value, and blend) 64
Geography (domestic, developed international, and emerging markets) 64
Exclude Alternative Investments and International Bonds 65
Criteria 67
Rebalancing: Always? 68
Market Timing 71
6 • INVESTING IN STOCKS 75
Total Rates of Return 77
Reinvest Dividends 80
August 13, 1982 and October 19, 1987 83
Lessons 85
A Formula to Evaluate an Asset Valuation 85
Behavioral Bias 90
7 • BEAR MARKETS 92
Prepare Fundamentally and Emotionally 92
March 2000–October 2002, October 2007–March 2009,
and February–May 2020 95
Managing Through a Bear Market 96
Market Corrections 97
8 • FORECASTS 99
Methodology 1: Financial Elements 101
Methodology 2: Historical Returns 102
An Adjusted Mathematical Calculation 103
Vanguard’s Outlook 103
Risks and Concerns 105
COVID-19 106
Climate Change 107
Racial Injustice 107
Wealth and Income Inequality 107
Capitalism and Managerial Excesses 108
The Diminished Supremacy of Law and Trust 108
China, Russia, and Iran 109
Receding U.S. Global Leadership 110
U.S. and Global National Debt and Deficits 110
Effectiveness of Monetary and Fiscal Policies 110
Security 111
Immigration and Migration 111
Proliferation of Nuclear Weapons 111
Demographics 111
9 • RECOMMENDED PORTFOLIOS 114
Portfolio and Investment Policies 114
Differences Between the Portfolios and Vanguard’s Recommendations 121
Vanguard 500 Index Fund (VFIAX) 122
Fidelity Investments Portfolios 123
Estimated Total Rates of Return 125
10 • INVESTING WITH VANGUARD
John C. Bogle’s Vision 127
My Experience 128
Review Your Statements 129
Personal Advisor Services 130
SUMMARY 131
Essential Elements to Remember 131
11 • INVESTING — FINAL THOUGHTS 134
12 • MY ADVICE FOR STUDENTS AND LIFE’S CHOICES 138
Choosing Your Career 138
Separate Career Decisions from Financial Ones 139
Think Analytically and Logically 139
Preparing for Life: Essential Skills 140
Further Thoughts 142
Values 142
Attitude 142
Life’s Countless Choices 144
Musical Bonus 147
Reflections 148
APPENDICES 149
1. Accessing Vanguard’s Materials 149
2. Vanguard’s Equity, Bond, and Money Market Mutual Funds and ETFs, and QQQ 150
Vanguard Equity Funds and ETFs 150
Vanguard Bond Mutual Funds 152
Vanguard Money Market Funds (Stable Value) 152
QQQ 153
3. Identifying a Superior Company 153
4. Vanguard’s Risk Potential Rating System (RPRS) 154
Conservative funds: Risk level 1 154
Conservative to moderate funds: Risk level 2 154
Moderate funds: Risk level 3 155
Moderate to aggressive funds: Risk level 4 155
Aggressive funds: Risk level 155